The National Economy

Topics: Gross domestic product, Macroeconomics, Inflation Pages: 9 (2352 words) Published: March 2, 2013
Chap1: The National Economy


the major macroeconomics issues
Economic growth;
governments try to achieve high rates of economic growth
economies suffer from inherent instability. As a result, economic growth and other macroeconomic indicators tend to fluctuate. Rate of eco growth: the percentage increase on national output, normally expressed over a 12 month period.

waste of human resources, unemployment benefits are a drain on gov revenues.

A general rise in prices throughout the economy.
Gov aim is to keep inflation both low and stable: to aid the process of decision making (able to set prices and wages rates, and make investment decisions with far more confidence). Rate of inflation: percentage increase in prices over a 12-month period.

The balance of payment and the exchange rate
A country's balance of payments account records all transactions between the residents of that country and the rest of the world. These transactions enter as either debit items or credit items. The debit items include all payments TO other countries. The credit items includes all receipts FROM other countries. Balance of payments account: A record of the country's transactions with the rest of the world. It shows the country's payments to or deposits in other countries (debits) and it receipts or deposits from other countries (credits). It also shows the balance between these debits and credits under various headings.

The sale of exports and any other receipts earn foreign currency. The purchase of imports or any other payments abroad use up foreign currency. If we start to spend more foreign currency than we earn, one of the two things must happen. Both are likely to be a pb: Balance of payment will go into deficit → Shortfall (deficit) of foreign currencies. Gov will have to borrow money from abroad, or drawn its foreign currency reserves to make up the shortfall. Pb because: if it goes on too long, overseas debts will mount up, along with the interest that must be paid; and/or reserves will begin to run low. The exchange rate will fall. Exchange rate: the rate at which one national currency exchanges for another. The rate is expressed as the amount of one currency that is necessary to purchase one unit of another currency

If gov does nothing to correct the balance of payments deficit, then the exchange rate must fall. A falling exchange rate is a pb because it pushes up the price of imports and may fuel inflation. If exchange rate fluctuates: uncertainty for traders and can damage international trade and economic growth.

Government and macroeconomic policy
Four macro eco policy objectives that governments typically pursue: high and stable economic growth
low unemployment
low inflation
the avoidance of balance of payments deficits and excessive exchange rate fluctuations.

Societies face trade-offs between economic objectives. For example, the goal of faster growth may conflict with that of great equality; the goal of lower unemployment may conflict with that of lower inflation (at least in the short-run). This is an example of opportunity cost: the cost of achieving less of another. The existence of trade-offs means that policy makers must make choices.


Aggregate demand: total spending on goods and services produced in the economy. It consists of four elements: consumer expenditures (C) or (Cd)
Investments (I)
government expenditures (G)
expenditures on exports (X)
less any expenditure on foreign goods and services (M).
Thus AD= C+I+G+X-M = CD+I+G+X

Consumption of domestically produced goods and services (CD) : The direct flow of money payment from households to firms.

The circular flow of income:
The diagram represents all the cash flows

The inner flow, withdrawals and injections
Withdrawals (W) or leakages: incomes of households or firms that are not passed on...
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